Sunday, March 15, 2009

Why AIG Needs To Pay Out $100 Million In Bonuses

Here's part of an email from financial industry friend Ó Coileáin, explaining why we're paying AIG people $100 million in bonuses. Remember that unlike other bailout-involved firms, we own 80% of AIG now.
- AIGFP is in the hole something like $100b, with potential losses much higher than that. Unwinding all their contracts is a bitch, and the people who already understand how best to do that are the current employees. Unwinding strange positions effectively is a giant mess even if you already understand all or most of them. I believe that having new employees step in would cost way more than the 10 bps they're paying to current employees.

- Imagine you're a trader at AIGFP. You've done pretty well for yourself over the last decade, actually, and probably you've got enough savings to retire. Not in the kind of luxury you're accustomed to, maybe, but some. Certainly you can ride out the recession without changing your lifestyle. Do you really want to keep working at AIGFP for a small amount (to you) of money to minimize the cost of unwinding the thing? No reputation, no promotion, no head start on a new career of some kind, and the job itself will be no fun. Honestly, you've got lots of egg on your face, but why stay?

So sure, I have no desire to pay these idiots, but this is one of those things that you just suck up in a bad situation. If it helps retain staff at AIGFP (those bastards), that cash was probably money well spent.
Personally, I'd really like it if we could bundle in some big future tax increases on business -- perhaps a securities transaction tax, an increase in capital gains rates, or a boost to corporate income taxes -- with whatever bailout legislation we pass. If you don't want it to kick in immediately for stimulus reasons or whatever, schedule it for 2011 or something. It's too late to get our money back from the people who created this catastrophe, and we're in the sad position where giving them more money ends up being the best way to save ourselves money. But if we're going to do that and create benefits for everybody by preventing total economic catastrophe, we might as well take back some share of the future benefits to Wall Street.


drip said...

My two comments are, first, if I run AIG and these guys were going to leave if I didn't give them bonuses, I definitely wouldn't give them bonuses, because second, I doubt there is much of value to "unwind" and what value there is could not possibly bear the burden of another go round with the folks who got us this far. I will grant that this explanation is better than the "we're contractually obligated" one I read in The NY Times today. I guess it's all in good fun, eh?

Neil Sinhababu said...

The thing to remember about these guys is that they were really heavily leveraged. In other words, there were lots of assets and tons of debt. So the stuff on the positive side of the balance sheet is probably pretty big -- it's just smaller than the gargantuan debt they took on, and the claims against them from CDS sales.

drip said...

Neil you're right about gross values but the net, after prior lien holders and co-obligors are satisfied, is likely to be smaller than anyone imagined. The promissory notes (which constitute the actual asset) may well be irretrievably lost or non-existent and in any case, the fine folks getting these bonuses will be of no help in collecting and selling the assets anyway. AIG's best hope is that they go to work for the competition. The good news is that AIG-sponsored Man U is dominating the English Premier League.

dr said...

For me, it isn't just about the efficiency of the unwinding. It's about how we define efficiency and, which is the same thing, what the unwinding is aimed at. Leaving these people in place means leaving them in a position to continue the Bush program of using the state to redistribute wealth from working to the investing class. I'm willing to believe that there will be costs associated with ending that program, I'm just not as upset by those costs as I am worried by the spectre that these foxes spending another decade in charge of the hen house.

Blar said...

What does your friend think about the possibility of using fearsome sticks instead of tasty carrots? The suggestion I've seen is to threaten (either subtly or openly) to thoroughly investigate AIG & prosecute any wrongdoing to the fullest extent of the law, unless the traders stick around and cooperate. Would that have any chance of working? Do the employees who we need to do the unwinding have records that would make them susceptible to this kind of threat? Would it motivate them to stay and get the job done?

Neil Sinhababu said...

My immediate thought is that it'd be really hard to make good on that sort of threat. Given that the CDS market was badly unregulated, there isn't a lot we can get people on. The traders just sat there and bought tons of weird stuff and then sold Credit Default Swaps that AIG didn't have the capital to properly back. But that's no crime, because of the paucity of regulation.

If he's reading, I hope he'll answer...

Neil Sinhababu said...

He emails:

"I read the comments on the AIG post and I think my expectations are what I expressed in my email yesterday: no apparent fraud, good reasons to expect that there was no fraud, and fairly deep-pocketed employees who'll sue you for screwing with them inappropriately makes me have relatively little faith in the coercive mode on this one.

Selling CDS you can't back probably isn't a crime even with decent regulation, btw -- you take your lumps. Lots of similar CDS was regulated as insurance, and you can see what happened to the companies who sold it (MBIA, Ambac, FSA, FGIC, AGO).

Fundamentally, these guys helped to blow up the world and you should hate them a lot -- it's impressive for anybody to lose a billion dollars, and by god they did it. Like a hundred of them pulled it off. The marginal hate you should have because it's probably a good business decision to pay them 0.1% of that to try to get some of it back just shouldn't trip the outrage-o-meter."

drip said...

There is much to what your emailer says. Let me respond in a devil's advocate's way that: 1) the fact that there was no fraud does not mean that the conditions for receiving the bonuses were met.; 2) The fact that payments were made to many people who have left the company is strong evidence of the fact that these so-called retention bonuses were not used to insure that the employees would help unwind the mess they created, nor were they used to retain the employees; 3) Funding people who threaten you with litigation is evidence that you are both stupid and afraid, either of which would whet the appetite of a plaintiff's lawyer, proving that AIG's management is inept (as if that is a news flash); and 4) Tim Geithner was in the room when all of this stuff happened and he is Obama's only guy in the bailout picture right now, meaning that he will look like a stooge for his Wall Street friends or a dolt if he can't stop this gravy train.

More important, to me, at least, is that although these payments seem to be chump change in you correspondent's eyes, it is the taxpayers who are the chumps and Obama will lose a great deal more than money if these payments are allowed to stand. When dopes like Grassley and Kit Bond can kick you around, when the future funding of the stimulus is at stake and when regulatory reform can be halted with the simple unanswerable question "if you can't stop retention bonuses to people who weren't retained, how can you expect to manage a financial institution" there is more than chump change on the line. This is a really big deal because the taxpayers (who own AIG) understand that this payment is wrong and Obama will pay the price in really significant ways if he can't change this outcome.

So, a failure to get some satisfaction out of this could have consequences far beyond the mere payment of a few tens of millions of dollars to a few lucky salesmen.